The People’s Bank of China (PBOC) is the central bank that controls the daily midpoint for the yuan, also called the renminbi or RMB. The yuan’s value changes within a set range, or “band,” around the midpoint, which is currently ±2%. Recently, the PBOC added 90 billion yuan to the financial system using seven-day reverse repos at a 1.40% interest rate. With 57.1 billion yuan maturing today, this results in a net injection of 32.9 billion yuan. This action shows the PBOC’s efforts to manage liquidity without causing sharp changes in short-term rates. By using seven-day reverse repos, a tool for controlling short-term cash, the PBOC aims to keep market flows stable. The daily midpoint is set, allowing the market to trade within a tightly controlled range, giving authorities some control over how market mood affects the official exchange rate. For traders, this means they must navigate markets that might not reflect prices in offshore trading. The net injection, while modest, suggests a slightly supportive policy. Although the repo rate remains the same, the PBOC’s operations indicate an intent to keep interbank rates low. Monitoring the difference between onshore and offshore yuan rates is crucial. When this spread widens, it often points to policy differences or potential interventions. The recent liquidity injection indicates a reluctance to let rates rise sharply, even with global funding pressures. Yi’s management style shows a preference for careful control rather than letting go. This means that derivatives tied to future yuan levels are likely to be slower to react than news events might suggest. Volatility structures will likely remain stable longer than what outside sentiment implies. Actions like these help avoid squeezing CNH shorts, especially when bets push against the trading band limits. The 2% band is still in effect, but we are noticing more frequent stronger midpoint fixes. This suggests an intention to steer sentiment without causing significant price changes. Derivative pricing, especially in options, will likely reflect that realized volatility is being reduced from above. In the coming weeks, we will closely monitor both the midpoint fix and the impact of liquidity operations each day. If the current trend of injecting funds continues while maintaining a 1.40% yield, forward points and swap spreads may stay low. Those using swap points should consider the effects of policy on market flattening, not just demand. Given the current situation, there is limited space for bullish RMB trades without a supportive move in the midpoint. With ongoing repo injections and no shift in policy direction, positioning should be light and focus on tactical opportunities during key policy actions. Finally, any changes in the size of PBOC operations—either in injections or maturities—could hint at larger macroeconomic intentions. Therefore, it’s important to respond to the central bank’s weekly tempo rather than depending solely on broader trends. This may be subtle but can have a significant impact.

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